Everyone reading this may see something different when they log into their retirement account, and that’s totally okay, as these tips generally apply to all retirement accounts accessible to customers via online portal.
“Every provider has a different website and some of them are very easy to navigate and some of them you kind of have to dig around a lot,” said Crystal Rau, a certified financial planner with Beyond Balanced Financial in Midland, Texas.
You may immediately see a landing page with all of your information and an easy-to-adjust contribution scale. Or, it may be like navigating a labyrinth.
Here are the three key things to hone in on when you log into your 401(k).
1. Your contribution rate
First thing’s first, see what you’re working with. Check your contribution rate so that you’re clear on what’s being put into the account in the first place.
Your contribution rate is the percentage of your salary that goes toward your retirement account. The more you contribute, the more you will (hopefully) have in retirement, but you’ll have less money per paycheck to play with today.
It’s important to know how much money you are currently contributing so you can set it to match your savings goals or make adjustments as necessary.
How much you should be contributing: 10% ... or more.
General rule-of-thumb advice is to aim to put 10% of your income toward retirement. But you can be more aggressive than that. Rau says you should aim to put 15% to 20% of your income into the retirement account, especially when you are young.
“If you learn to live on less in the beginning, as your salary grows over the years, you're going to be used to living with that percentage gone already because you're used to saving it,” explained Rau.
Justin Harvey, founder of Quantifi Planning, a Philadelphia-based financial planning company says “Ten percent is a good savings rate … but if you can save 20%, 30%, I’d say do it because the more you can save and the quicker you can do it, the quicker you won’t be beholden to an employer.”
The best strategy for maximizing your retirement account, he suggests, is to pick a number as high as you can stand that would allow you to still pay your bills every month.
2. Your investment or asset allocation
If you see a pie chart, or some other chart with categories, take a look at it. It may give you an idea of your current asset allocation. The allocations you see will likely be a mix of equity (or stock) and fixed assets (bonds and cash). The pie chart won’t get into much detail beyond the general labels, but it will show a general breakdown of where your assets are sitting at the moment.
“Look at your pie chart or your breakdown and just make sure the allocation is appropriate for your risk [tolerance] level,” said Smith.
Your asset allocation is a window into how aggressive or how conservative you are being with your investments. If you’re heavily invested in stocks and you’re nearing retirement, you’re probably taking on too much risk and should shift more of your savings into conservative investments like bonds. If you’re young, however, you’ve got decades ahead of you to take risks and it’s typically advised that younger workers take an aggressive, stock-heavy approach to their allocation.
If you’ve never touched your retirement account, but you’re contributing, you may be surprised to find your funds may not be growing as you believed they were.
“More than likely, the contributions are going to default to a money market account, which is basically like a savings account,” said Rau. “There's zero growth and so not taking action and choosing investments, you're basically just putting your money in a glorified savings account.”
Not sure what your ideal mix of stocks versus bonds is? Take your age and subtract it from 100 (or 110 if you’re more aggressive). The bigger number is how much you should allocate to stocks. The smaller is how much you should allocate to bonds.
3. Fees on your investments
Investing isn’t free, because there are massive investment firms behind them pulling the strings. Some do more pulling than others, and they charge for that extra management. On the other hand, passively managed funds can be much less expensive.
The different investment options you’ll see in your 401(k) plan page each should come with information about fees. The key fee to look at is your expense ratio — the annual fee funds charge their shareholders to operate the mutual fund.
“Anyone that has a computer they should get into a website like Yahoo! Finance and type in that fund name and one of the first thing that pop up is an expense ratio,” says Rau. “Anything over 1% is more on the expensive side. Really expensive would be over 1.5%.”
Rau says the expense ratio isn’t the most important thing for new investors to pay attention to, but it's something new investors should be aware of since it could cut into their overall return.
If you pay a 1% annual fee on your return and your fund averages 7% a year, for example, you would technically earn only a 6% return overall, instead of 7% because you're having to account for those fees. She recommends choosing a fund with an expense ratio below 1%, closer to 0.7 or 0.8%.
You can get much lower fees that even that by choosing low cost mutual funds, which aren’t actively managed by an investment firm and are much less fee-heavy.
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